How Aging Demographics and Globalization Will Change the Way We Live

Main Menu

Tax Reform

Tax matters have truly moved to center stage. Republicans have advanced their proposals. Though they differ from Trump’s campaign promises and from the sketch offered by the White House earlier this year, they are similar enough to have earned White House approval, at least for now. Democrats, of course, have panned the proposals as inadequate and inequitable. As the party of opposition, they could hardly do otherwise at this stage. And the lobbyists for those presumably hurt by the proposals have made their objections known. The debate will only intensify.

For all this, there is a good chance that something similar to these proposals will become law. Republicans, after all, hold majorities in both houses of Congress. But more, the outlines of these proposals — their emphasis on ridding the code of complicating deductions and using the resulting collections to reduce statutory rates — have received bipartisan support over the years. There are no guarantees, of course, and the final details will no doubt differ from those on the table right now, but the outlines should remain intact.

In many ways, the contours of the present reform proposals resemble the bipartisan bill passed under President Reagan in the 1980s. They certainly capture those made in 2010 by President Obama’s National Committee on Fiscal Responsibility. Called the Simpson-Bowles Commission after its leadership, former Senator Alan Simpson and former White House Chief of Staff Erskine Bowles, the Committee recommended the elimination of some 150 special credits and deductions in the individual code and an expansion of the standard deduction to the benefit of all tax payers. It suggested a further simplification by conflating the six individual tax brackets prevailing at the time into three. The additional flow of tax monies expected from the elimination of breaks enabled Simpson-Bowles to recommend a reduction of statutory rates for individuals at each level and a reduction in that statutory corporate rate from 35 to 28 percent.

Simpson-Bowles justified such changes in terms of both fairness and economic efficiency. Loophole closing, they argued, would force those who had used the breaks pay their fair share. Ridding the code of complexity would improve economic growth prospects by clarifying the tax consequences of any action and by allowing people and businesses to make decisions less for economic reasons than to take advantage of the political preferences built into the code. The general reduction in statutory rates would further enhance growth prospects by encouraging individuals to work and business to invest more for the future. Lower statutory corporate rates would offer still one more benefit by encouraging U.S. companies to repatriate the accumulated earnings they held overseas, giving the economy a welcome cash infusion for investment. Simpson-Bowles could have argued, though it did not, that better economic prospects, welcome in themselves, would also tend to ease social tension, as would the elimination of preferences in the code by lifting the sense that the system is rigged for a favored few.

Almost all reform proposed over the years since, by either Democrats or Republicans, has shared the basic elements and justifications of Simpson-Bowles. President Obama pressed Congress several times to pass legislation along these lines. Only a few years after Simpson-Bowles, the Republican Chair of the House Ways and Means Committee Rep. David Camp proposed the elimination of or capping of tax breaks and a similar, though slightly more robust cut in statutory rates. President Obama revisited such reforms in his 2015 budget, though with a modest net tax increase. The following year, Republican Paul Ryan, then chair of the House Ways and Means Committee, put forward his version of a “better way,” which, though it had different figures from either Camp or the president, embraced the same principles of simplification and statutory rate reductions.

These recent Republican proposals are of a piece with these. They would reduce the number of individual tax brackets from seven presently to four and reduce the statutory rate at each level except the highest. The plan would also strip away breaks in the corporate code and reduced the statutory rate from 35 percent presently to 20. To bring home the monies held overseas by American firms, estimated recently at some $2.4 trillion, the proposals would allow a one-time opportunity for companies to repatriate earnings at only a 12 percent tax rate. With a low statutory rate of 20 percent, the Republicans have argued, companies would no longer have much incentive to accumulate earnings overseas.

Such similarities to previous plans, both Republican and Democratic, would seem to point to success. To be sure, disagreements over detail have stymied past reform efforts. Members of Congress have already begun to push their favorite tax breaks aimed at their favorite constituencies. The parties also continue to differ, as they long have, on how the tax burden should net out after simplification and rate reduction, with Democrats pushing for a net tax increase while Republicans push for a net tax cut. But since all seem to agree on the basic principles of reform, an energetic White House would seem capable of bridging such differences. Had President Obama worked more energetically, some would say worked at all on the matter, the country probably would have enjoyed similar tax reforms years ago. If Trump is half the dealmaker he claims to be, he should have little difficulty with the kind of arrangements that would permit the clear agreement on principles carry reform into law.

Negotiations actually began some time ago. The exact figures for statutory rates, both individual and corporate, have changed several times, and the usual interest groups have lobbied to retain their special place in the code. The administration, which tried to tempt Democrats with what the media referred to as “unorthodox” proposals, has withdrawn them. House Speaker Paul Ryan weeks ago offered to bridge the divide over whether the final deal will include net tax increases or decreases by seeking a revenue-neutral solution. The speed of give and take will no doubt accelerate now, providing ample grist for media speculation and skepticism. Such developments, however, are hardly the sign of trouble, as some have claimed, but rather is a sign that the process is working. There is never a guarantee, but likelihoods suggest that the nation will eventually get something along these lines.